(12) DERIVATIVE ACTIVITIES

We use commodity-based derivative contracts to manage exposure to commodity price fluctuations. We do not enter into these arrangements for speculative or trading purposes. We typically do not utilize complex derivatives, as we utilize commodity swaps, collars, options or combinations thereof to (1) reduce the effect of price volatility of the commodities we produce and sell and (2) support our annual capital budget and expenditure plans. In third quarter 2017, we entered into combined natural gas derivative instruments containing a fixed price swap and a sold option to extend or double the volume (referred to as a swaption in the table below). The swap price is a fixed price determined at the time of the swaption contract. If the option is exercised, the contract will become a swap treated consistently with our fixed-price swaps. The fair value of our derivative contracts, represented by the estimated amount that would be realized upon termination, based on a comparison of the contract price and a reference price, generally the New York Mercantile Exchange (“NYMEX”) for natural gas and crude oil or Mont Belvieu for NGLs, approximated a net loss of $14.6 million at September 30, 2017. These contracts expire monthly through December 2019. The following table sets forth our commodity-based derivative volumes by year as of September 30, 2017, excluding our basis and freight swaps which are discussed separately below:

Period	Contract Type	Volume Hedged	Weighted Average Hedge Price
Natural Gas
2017	Swaps ⁽¹⁾	878,370 Mmbtu/day		$ 3.21
2018	Swaps	477,534 Mmbtu/day		$ 3.22
January-March 2019	Swaps	50,000 Mmbtu/day		$ 3.01
2017	Collars ⁽¹⁾	122,609 Mmbtu/day		$ 3.45–$ 4.11
2018	Collars	60,000 Mmbtu/day		$ 3.40–$ 3.76
2017	Purchased Puts ⁽¹⁾	185,870 Mmbtu/day		$ 3.50 ⁽²⁾
2017	Sold Calls	17,935 Mmbtu/day		$ 3.75 ⁽³⁾
April-December 2018	Swaptions	320,000 Mmbtu/day ⁽⁴⁾		$ 3.04 ⁽⁴⁾
2019	Swaptions	60,000 Mmbtu/day ⁽⁴⁾		$ 3.00 ⁽⁴⁾

Crude Oil
2017	Swaps ⁽¹⁾	9,511 bbls/day		$ 56.03
2018	Swaps	6,000 bbls/day		$ 52.96
2019	Swaps	1,000 bbls/day		$ 51.50

NGLs (C2-Ethane)
2017	Swaps	3,000 bbls/day		$ 0.27/gallon
2018	Swaps	250 bbls/day		$ 0.29/gallon

NGLs (C3-Propane)
2017	Swaps	17,576 bbls/day		$ 0.61/gallon
2018	Swaps	8,935 bbls/day		$0.66/gallon

NGLs (NC4-Normal Butane)
2017	Swaps	9,000 bbls/day		$ 0.76/gallon
2018	Swaps	4,558 bbls/day		$ 0.81/gallon

NGLs (C5-Natural Gasoline)
2017	Swaps	6,416 bbls/day		$ 1.08/gallon
2018	Swaps	4,027 bbls/day		$ 1.17/gallon

⁽¹⁾	Includes derivative instruments assumed in connection with the MRD Merger.

⁽²⁾	Weighted average deferred premium is ($0.32).

⁽³⁾	Weighted average deferred premium is $0.31.

⁽⁴⁾

Contains a combined derivative instrument consisting of a fixed price swap and a sold option to extend or double the volume. For April through December of 2018, we have swaps in place for 160,000 Mmbtu per day on which the counterparty can elect to double the volume at a weighted average price of $3.02. We also have swaps in place for 160,000 Mmbtu per day on which the counterparty can elect to extend the contract through December 2019 at a weighted average price of $3.07. In 2019, if the counterparty elects to double the volume, we would have additional swaps covering 60,000 Mmbtu per day at a weighted average price of $3.00.

Every derivative instrument is required to be recorded on the balance sheet as either an asset or a liability measured at its fair value. We recognize all changes in fair value of these derivatives as earnings in derivative fair value income or loss in the periods in which they occur.

Basis Swap Contracts

In addition to the swaps described above, at September 30, 2017, we had natural gas basis swap contracts which lock in the differential between NYMEX Henry Hub and certain of our physical pricing indices primarily in Appalachia. These contracts settle monthly through March 2019 and include a total volume of 130,120,000 Mmbtu. The fair value of these contracts was a loss of $4.7 million on September 30, 2017.

At September 30, 2017, we also had propane basis swap contracts which lock in the differential between Mont Belvieu and international propane indices. The contracts settle monthly through December 2018 and include a total volume of 659,000 barrels in 2017 and 750,000 barrels in 2018. The fair value of these contracts was a gain of $1.1 million on September 30, 2017.

Freight Swap Contracts

In connection with our international propane basis swaps, at September 30, 2017, we had freight swap contracts which lock in the freight rate for a specific trade route on the Baltic Exchange. These contracts settle monthly in fourth quarter 2017 through December 2018 and cover 5,000 metric tons per month with a fair value gain of $45,000 on September 30, 2017.

Derivative Assets and Liabilities

The combined fair value of derivatives included in the accompanying consolidated balance sheets as of September 30, 2017 and December 31, 2016 is summarized below. The assets and liabilities are netted where derivatives with both gain and loss positions are held by a single counterparty and we have master netting arrangements. The tables below provide additional information relating to our master netting arrangements with our derivative counterparties (in thousands):

		September 30, 2017
		Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet			Net Amounts of Assets Presented in the Balance Sheet
Derivative assets:
Natural gas	–swaps	$	37,288	$	(12,385	)	$	24,903
	–swaptions		9,092		(8,711	)		381
	–basis swaps		3,782		(2,774	)		1,008
	–collars		6,214		(2,101	)		4,113
	–puts		8,547		(4,238	)		4,309
Crude oil	–swaps		7,133		(2,918	)		4,215
NGLs	–C2 ethane swaps		82		(82	)		—
	–C3 propane swaps		—		(2,956	)		(2,956	)
	–C3 propane basis swaps		18,169		(18,169	)		—
	–NC4 butane swaps		34		(4,340	)		(4,306	)
	–C5 natural gasoline swaps		115		(1,094	)		(979	)
Freight	–swaps		47		(47	)		—
		$	90,503	$	(59,815	)	$	30,688

		September 30, 2017
		Gross Amounts of Recognized (Liabilities)			Gross Amounts Offset in the Balance Sheet		Net Amounts of (Liabilities) Presented in the Balance Sheet
Derivative liabilities:
Natural gas	–swaps	$	(10,805	)	$	12,385	$	1,580
	–swaptions		(16,694	)		8,711		(7,983	)
	–basis swaps		(8,458	)		2,774		(5,684	)
	–collars		—			2,101		2,101
	–puts		—			4,238		4,238
	–calls		(29	)		—		(29	)
Crude oil	–swaps		(1,031	)		2,918		1,887
NGLs	–C2 ethane swaps		(125	)		82		(43	)
	–C3 propane swaps		(36,046	)		2,956		(33,090	)
	–C3 propane basis swaps		(17,072	)		18,169		1,097
	–NC4 butane swaps		(13,700	)		4,340		(9,360	)
	–C5 natural gasoline swaps		(4,678	)		1,094		(3,584	)
Freight	–swaps		(2	)		47		45
		$	(108,640	)	$	59,815	$	(48,825	)

		December 31, 2016
		Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheet			Net Amounts of Assets Presented in the Balance Sheet
Derivative assets:
Natural gas	–swaps	$	13,213	$	(11,425	)	$	1,788
	–basis swaps		12,535		(9,437	)		3,098
	–collars		6,298		(6,298	)		—
	–puts		18,159		(15,429	)		2,730
Crude oil	–swaps		9,356		(3,489	)		5,867
NGLs	–C2 ethane swaps		53		(53	)		—
	–C3 propane basis swaps		17,396		(17,396	)		—
	–NC4 butane swaps		4		(4	)		—
Freight	–swaps		65		(65	)		—
		$	77,079	$	(63,596	)	$	13,483

		December 31, 2016
		Gross Amounts of Recognized (Liabilities)			Gross Amounts Offset in the Balance Sheet		Net Amounts of (Liabilities) Presented in the Balance Sheet
Derivative liabilities:
Natural gas	–swaps	$	(158,359	)	$	11,425	$	(146,934	)
	–basis swaps		(687	)		9,437		8,750
	–collars		(2,625	)		6,298		3,673
	–puts		—			15,429		15,429
	–calls		(1,041	)		—		(1,041	)
Crude oil	–swaps		(13,206	)		3,489		(9,717	)
NGLs	–C2 ethane swaps		(1,008	)		53		(955	)
	–C3 propane swaps		(32,437	)		—		(32,437	)
	–C3 propane basis swaps		(18,138	)		17,396		(742	)
	–NC4 butane swaps		(13,419	)		4		(13,415	)
	–C5 natural gasoline swaps		(12,176	)		—		(12,176	)
Freight	–swaps		—			65		65
		$	(253,096	)	$	63,596	$	(189,500	)

The effects of our derivatives on our consolidated statements of operations are summarized below (in thousands):

	Derivative Fair Value (Loss) Income
		Three Months Ended September 30,						Nine Months Ended September 30,
		2017			2016			2017			2016
Commodity swaps	$	(87,861	)	$	38,662		$	172,457		$	(40,270	)
Swaptions		(7,602	)		—			(7,602	)		—
Collars		956			1,320			15,221			1,320
Puts		(73	)		2,842			9,646			2,842
Calls		104			—			1,144			—
Basis swaps		6,113			21,853			(2,554	)		24,929
Freight swaps		(63	)		(121	)		14			(155	)
Total	$	(88,426	)	$	64,556		$	188,326		$	(11,334	)